Highway Trust Fund Inequities Will Get Worse in Future Years

Among the many contentious issues in the federal highway program
is the inherently unequal distribution of trust fund revenues to
the states.

Under current law, the federal fuel taxes paid into the trust
fund by motorists and truckers are returned to the states by a
mathematical formula that attempts to match the scope and usage of
each state's surface transportation system with payments received
from the federal government.[1] But as a consequence of flaws in the
formula, many states (donors) consistently receive less than they
pay in while others (donees) consistently receive more. This
deficiency, in turn, exacerbates regional transportation problems
because the shortchanged states are typically those with above
average population growth whose transportation needs exceed that of
the slower growing states. While half-hearted efforts have been
made in the past to mitigate this problem, little real progress has
occurred, and the expected depletion of the trust fund in FY 2009
will reverse what little progress has been made to date.

Highway Robbery

Over the past several decades, the states shortchanged by the
program have been concentrated in the Southeast and the Great Lakes
region plus California and Arizona. The states receiving more than
their fair share have been concentrated in the Northeast and Middle
Atlantic states and the sparsely populated Mountain states. In
2006, there were 30 donor states and 20 donees, although many
states were close to being even in their return ratios.[2] In
2006, Texas, for example, received only an 84.7 percent payback,
costing it $509 million in lost federal payments that year, while
Florida received just 82.5 percent, California 86.9 percent, and
South Carolina 88.6 percent.

As reported in an earlier Heritage paper,[3] these same states,
and many others, have been consistent losers since the program's
creation in 1956. Over the past 50 years, Texas received just 80.3
percent, Oklahoma 83.8 percent, and Georgia 84.0 percent.

As unacceptable as these losses were, they would have been much
worse had not SAFETEA-LU (the highway reauthorization bill, enacted
in August 2005) created the Equity Bonus program to partially
offset donor states' losses. Under this program the U.S. Department
of Transportation (USDOT) was authorized to spend up to $41 billion
of trust fund money between FY 2005 and FY 2009 to ensure that
states received a minimum share of 90.5 percent in 2006, rising to
92 percent by 2009. Despite these goals, the benefits of the
program have been greatly exaggerated. Achieving even the modest
goal of a 90.5 percent share relied entirely on the proposition
that the highway trust fund would each year spend more than it
received in federal fuel tax revenues"with the excess funds used to
partly even things out for donor states"and that an inaccurate
methodology would be used to calculate the shares.

For example, under the methodology of share or return ratio
calculations used in this paper, Texas in 2006 experienced a 84.7
percent return ratio, reflecting the fact that its tax revenues
accounted for 8.76 percent of the money flowing into the fund
compared to the 7.42 percent of trust fund spending it received
(7.42 is 84.7 percent of 8.76). In contrast to this more accurate
measure of equity, Congress and the USDOT base their share
calculations on the total dollars paid into the fund compared to
dollars paid out, which are distorted by the excess spending of
recent years. By this method the USDOT reports that Texas received
a 96 percent share, reflecting $2.9 billion it paid in and the $2.8
billion it received.

As noted earlier, the ability to achieve the modest equity goals
using the USDOT method requires the trust fund to spend more money
than it takes in, which can occur only if the trust fund possesses
a significant surplus. When SAFETEA-LU was enacted, the trust fund
surplus was above $10 billion, but years of overspending and
sluggish growth in fuel tax revenues, among other factors, have
depleted the surplus. In FY 2006, for example, trust fund spending
totaled $38 billion, compared to the $33.7 billion it received in
fuel tax revenues. As a consequence, the surplus was expected to
hit zero in early FY 2009, but Congress and the President agreed to
an unprecedented bailout of the fund (H.R. 6532) with $8 billion in
general taxpayer revenues (enough to carry through to the
expiration of SAFETEA-LU in September 2009).

No Remedy in Sight

Spending inequities could potentially get worse as a result of
the fund's deficiency. Unless federal fuel taxes are soon increased
substantially, or Congress and the President agree to ongoing
bailouts of the highway trust fund, the already inadequate equity
bonus program will effectively lapse.

Under the circumstances, the prospects of either of these
remedies occurring in the near future are dim. With gasoline prices
likely to still be in the $3'$4 per gallon range, Congress might
not be inclined to make that burden any worse by adding more taxes
to fuel costs. But even if they wanted to, a fuel tax increase
would not become law until a new highway reauthorization is
enacted, which is scheduled to take place next October. But few of
the recent highway reauthorization bills have been enacted at the
expiration of the previous one, and SAFETEA-LU was 20 months
late.

Without a timely renewal of the federal highway program at
substantially higher taxes, the only other relief option within the
confines of a top-down, command and control, Washington-centric
program would be an ongoing (and very costly) general fund bailout
to maintain the meager equity improvements expected to be achieved
in the final years of SAFETEA-LU.

A Simple Solution

Alternatively, if one is willing to abandon the requirement that
the current system continue as a Washington-knows-best program, the
solution to achieving interstate equity without another taxpayer
bailout or tax increase is a simple one: Allow each state to keep
the 18.3 cents per gallon federal fuel tax revenues collected
within its borders to spend on the surface transportation
priorities of its own choosing. Legislation to enact such a plan
has already been introduced in the Senate: Titled the
Transportation Empowerment Act (S. 2833), the bill would transfer
taxing and spending responsibilities to each state in a five-year,
incremental phase out of the federal highway program.

Despite the simplicity of the solution, many in Congress will
oppose it, because it would require them to surrender earmarks, and
the ability to divert trust fund money to non-transportation
purposes. Nonetheless, the deprived donor states are of sufficient
number to force a meaningful resolution of the issue, and a good
place to start would be the creation of donor state caucuses in the
House and the Senate in advance of the next highway bill
debate.

Ronald D. Utt, Ph.D., is
Herbert and Joyce Morgan Senior Research Fellow in the Thomas A.
Roe Institute for Economic Policy Studies at The Heritage
Foundation.

[1]
Different formulas apply to different federal highway programs. The
Surface Transportation Program, for example, uses total lane miles
of federal aid highways, total vehicle miles traveled (VMT) on
federal-aid highways, and a state's share of trust fund tax
payments to determine each state's apportionment.

Share

As a consequence of flaws in the highway trust formula, many statesconsistently receive less than they pay in while othersconsistently receive more. There's a simple way out of this mess,even though it would be unpopular with Members of Congress.

Rep. Peter Roskam (R-IL) says it's "a great way to start the day for any conservative who wants to get America back on track."

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